The Case for Cost Containment

We have found that many of our clients are concerned about the rising costs of their drug plans. The statistics are frightening – prescription drugs account for approximately 70% of total group Healthcare claim costs1. That number is expected to grow as Canadians spend more and more on pharmaceuticals. Between 2000 and 2010, Canadians in general spent an average of 8.6% more on prescription drugs each year2. That amounts to a $6.9 billion increase within ten years.

Managing healthcare costs today is largely about managing drug costs.

What is driving the increase in drug costs?
New drugs – Medical research is creating revolutionary drugs, but the costs are heavy, sometimes tens of thousands of dollars for a one-year course of treatment. Pharmaceutical companies must recover the millions of dollars invested on research and testing. Expensive ingredients also drive the cost of drugs higher.

Demographics – as baby boomers age, their need for medical treatment increases. More people are requiring drug therapy, the number of prescriptions required per person is rising, as is the average cost of the medications being prescribed.

Inflation – In 2010 alone, inflation was responsible for a 3.9% increase in the average cost per prescription.

Reduced hospital stays – More procedures are being performed on an out-patient basis, and hospital stays are briefer. Medications that were once provided in-hospital are now the patient’s responsibility as they recover at home.

The legislative environment – In an effort to control their own costs, governments across Canada are making moves to shift healthcare and drug costs onto the private sector.

Promotional spending – whether you consider drug promotion a threat or valuable patient education, there’s no question that it works. Drug manufacturers pour millions of dollars into promotion, whether it’s in the form of television, radio, and magazine ads, free samples or online promotions.

To help you meet the challenge of balancing rising healthcare costs with maintaining adequate coverage, insurance carriers are offering cost-containment solutions. A menu of options for plans with our pay-direct drug card (Assure card) is outlined in the following pages.

Remember – Communication is the Key to Success

If you choose to implement cost containment measures, great communication is the key to helping their employees understand the need for these changes.

The first three months after introducing any managed plan is difficult, as plan members will have questions, and may experience drug claim rejections for the first time. Complaints will happen, even with the most effective communication strategy.

Cost Containment Options

Generic Substitution
Generic substitution means that the plan reimburses the value of the generic equivalent of a drug, regardless of what has been prescribed, unless the physician indicates ‘no substitution’ on the prescription. There are some formularies that require generic substitution, like the provincial formularies, and other formularies that give plan sponsors the flexibility to make their own decisions.

Co-insurance
The co-insurance percentage determines the amount the plan will pay per eligible prescription after any deductibles have been met. Co-insurance is usually expressed as a percentage of the benefit covered. For example, if the plan pays 80% of the benefit, plan members are responsible for a 20% co-payment.

Per Prescription Deductibles
A per prescription deductible is what the plan member must pay for each prescription drug claimed. It can be set to a specific amount, or it can be set to equal the dispensing fee portion of the drug. For example, if the deductible is $5, the plan member must pay the first $5 of each prescription claimed.

However, unless deductibles are increased in proportion to the rising cost of covered drugs, the impact of this cost containment measure erodes over time.

Dispensing Fee Limits*
The cost of prescription drugs includes both the ingredient cost and a dispensing fee. The dispensing fee is what pharmacies charge to cover their business expenses. These fees vary by pharmacy, province and region. Pharmacies do not need to display their dispensing fees on the pharmacy receipt, except in B.C. and Ontario, where it is required by law.

A dispensing fee limit sets the maximum amount the plan will cover per prescription. It encourages plan members to become wise consumer and shop for the best combination of price and service to suit their needs.

Drug Maximums*
A drug maximum is the amount per person, per calendar year, that the plan will reimburse for prescription drug coverage. It can be set at a specified amount or can be unlimited. For example, if the drug maximum of $2,000, that is the maximum amount per calendar year the plan will pay after deductibles and coinsurance.

Drug Formularies
There are thousands of prescription and non-prescription drugs on the market today. Each one is assigned a unique drug identification number, or DIN. However, the drugs themselves are not always unique and can vary widely in price. For example, the active ingredient found in a particular drug might be available in capsule, tablet, or liquid form; slow or quick release; regular or extra strength. Each of these formulations has its own DIN. Please refer to the Cost Containment Formularies In Depth hand-out for a detailed description of each cost containment formulary.

There are also generic versions of some brand-name drugs. The pain reliever acetaminophen (Tylenol) is a good example. Although it is sold under many different brand names, the active ingredient is the same, whether it’s a store or nationally advertised brand.

It is neither medically or cost-effective for a drug plan to cover every DIN on the market. This is one of the reasons many drug plans use a formulary. A formulary is a list of drugs that a plan will cover. There are many different types of formularies, but the overall goal of each one is to help manage drug costs. Some formularies add new drugs only after their therapeutic value and cost effectiveness has been proven. Some formularies only allow generic drugs, while others follow the guidelines set by formularies used by provincial governments.

Two Tiered Plans
AA two-tiered drug plan allows plan sponsors to cover two formularies at two different levels of reimbursement. This option lets them maintain broad coverage, while still lowering overall costs. For example, a tier one (base plan) formulary can provide higher reimbursement of basic prescription drug needs, while a second tier can cover additional drugs at a lower coinsurance level.

* A note for plan sponsors in Quebec.
This option is not available to group plan sponsors in Quebec. The Quebec government has a public drug plan that covers anyone who is not eligible for coverage under a private plan. This plan is administered by the Régie de l’Assurance Maladie du Québec (RAMQ). The law in Quebec also requires private drug plans to provide equivalent or better coverage than the public plan. Plan sponsors in Quebec are limited in how much they can alter their drug coverage since they must ensure it conforms to RAMQ.

Renewal Factors

There are many factors that influence plan pricing at renewal time.

    Five major factors are:
  • Target Loss Ratios
  • Trending Patterns (inflation)
  • Member Demographics
  • Member Claims Experience
  • Government Cost Shifting

Target Loss Ratio (TLR): The TLR represents a percentage of premium dollars collected by the carrier which are anticipated to be paid out in claims. A typical TLR for a group of 35 lives is 72%.

Trending Patterns:A trending pattern represents, the anticipated increase in claiming patterns in any given Benefit Line. For example, Health and Drug Trending Pattern is approximately 18%.

Member Demographics: The demographics of a company, which encompasses age, sex, and size, will factor into pricing as it changes.

Member Claim Experience: Member claim experience is defined as, the amount of claims paid in relation to the Target Loss Ratio.

Government Cost Shifting: Governments continue to reduce social programs which directly increase the cost incurred by private member programs.

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